Thursday, July 3, 2014

United States Government Accountability Office (GAO)
June 2014
Prescription Drugs
Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices

GAO found that Medicaid paid the lowest average net prices across a
sample of 78 high-utilization and high-expenditure brand-name and
generic drugs when compared to prices paid by the Department of Defense
(DOD) and Medicare Part D. Specifically, Medicaid's average net price
for the entire sample was $0.62 per unit, while Medicare Part D paid an
estimated 32 percent more ($0.82 per unit) and DOD paid 60 percent more
($0.99 per unit). Similarly, Medicaid paid the lowest net price for the
subset of brand-name drugs in the sample, while DOD paid 34 percent more
and Medicare Part D paid an estimated 69 percent more. Medicaid also
paid the lowest net price for the subset of generic drugs, while
Medicare Part D paid 4 percent more and DOD paid 50 percent more.

GAO found that multiple factors affected the net prices paid by each
program. Specifically, a key factor for the entire sample and the
brand-name subset was the amount of any post-purchase price adjustments,
which are the refunds, rebates, or price concessions received by each
program from drug manufacturers after drugs have been dispensed to
program beneficiaries. These price adjustments ranged from about 15
percent of the gross price for Medicare Part D to about 31 percent for
DOD, and nearly 53 percent for Medicaid across the entire sample. The
gross prices each program negotiated with pharmacies and the magnitude
of beneficiary-paid amounts also contributed to differences in net
prices paid by the three programs, but to a lesser degree.

In some cases, VA beneficiaries can obtain drugs on a fee-for-service
basis through non-VA facilities. These make up a very small proportion
of VA drug expenditures (less than 1 percent in fiscal year 2010).
Therefore we did not include VA in this report comparing prices paid to
retail pharmacies.

The statutory framework allowing each program to obtain post-purchase
price adjustments contributes to the wide range of percentages observed.
Medicaid's federally mandated rebates apply to virtually all drugs,
while DOD's refunds only apply to certain drugs (i.e., primarily
brand-name drugs). Furthermore, we found that even when DOD received a
refund for a given drug, DOD's per-unit refund amount was less than
Medicaid's per-unit rebate for most of the drugs in our sample even
though we applied only the federally mandated (i.e., URA-based) rebates
for the calculation of Medicaid net prices. If we had been able to
accurately apply the Medicaid state supplemental rebates, the per-unit
Medicaid rebate amounts would be even larger (i.e., a greater percentage
of the gross unit price) than we report. Finally, we found that Medicare
Part D obtained the lowest per-unit price adjustments among the three
programs. In contrast to the statutory authority allowing DOD and
Medicaid to collect specific refunds and rebates, Medicare Part D plan
sponsors rely on independent negotiations to obtain price concessions
from drug manufacturers. As we have previously reported, plan sponsors
have noted limitations on their ability to negotiate price concessions
for some drugs due to formulary requirements set by CMS, lack of
competitors for some drugs, or low utilization for some drugs that limit
incentives for manufacturers to provide price concessions.

When GAO compared prices paid by the Department of Defense (DOD) and the
Department of Veterans Affairs (VA) for a sample of 83 drugs purchased
in the first calendar quarter of 2012, DOD's average unit price for the
entire sample was 31.8 percent ($0.11 per unit) higher than VA's average
price, and DOD's average unit price for the subset of 40 generic drugs
was 66.6 percent ($0.04 per unit) higher than VA's average price.
However, VA's average unit price for the subset of 43 brand-name drugs
was 136.9 percent ($1.01 per unit) higher than DOD's average price.
These results were consistent with each agency obtaining better prices
on the type of drugs that made up the majority of its utilization:
generic drugs accounted for 83 percent of VA's utilization of the sample
drugs and brand-name drugs accounted for 54 percent of DOD's utilization
of the sample drugs. DOD officials told GAO that in certain
circumstances they are able to obtain competitive prices for brand-name
drugs - even below the prices for generic equivalents - and therefore
will often preferentially purchase brand-name drugs.

These two GAO reports explain prices that the federal government pays
for drugs and the mechanisms for pricing of those drugs within the
Department of Veterans Affairs, Medicaid, Department of Defense, and
Medicare Part D programs. The mechanisms are complex, and you have to
read the full reports to fully understand them.

The bottom line is that government agencies are far more effective in
negotiating optimal pricing than are the private insurers that
administer the Medicare Part D program. As an example, the Medicare Part
D insurers paid 69 percent more for brand-name drugs than did Medicaid.

The private Part D plan sponsors tout their effectiveness in using
market principles to obtain best prices - supposedly the reason for
their existence - yet they complain that they have not been as
effective as the government because of "formulary requirements set by
CMS, lack of competitors for some drugs, or low utilization for some
drugs that limit incentives for manufacturers to provide price concessions."

Formulary requirements? The government agencies include in their
formularies the drugs that patients need. The private insurers attempt
to exclude from their formularies drugs that do not provide optimal
profit opportunities. Complaining about "formulary requirements set by
CMS" does not explain their inability to to obtain best prices for the
government since the government has its own de facto formulary
requirements for the VA, DOD and Medicaid programs.

Lack of competitors for some drugs? The government agencies also
negotiate within the same pharmaceutical environment wherein there is a
lack of competitors for some drugs.

Low utilization for some drugs that limit incentives for manufacturers
to provide price concessions? The government agencies also include low
utilization drugs in their formularies.

Medicare Part D was designed based on the fraudulent contention that
private marketplace dynamics are more effective then government
negotiation in obtaining maximum value - a position that wastes
government/taxpayer funds by paying excessive prices in the private
sector compared to the price concessions that the government can obtain.
We would not be tolerating this fraud if we had a properly designed
single payer national health program.